ROSCA participation is strictly voluntary. In the modern context, Jacqueline Copeland-Carson found that some ROSCAs have official positions including chair, secretary, treasurer, and auditor.144 Most of the groups she reviewed have formal written bylaws, and keep meeting minutes.145 Meetings typically happen in individual homes. In its most basic form, the officers collect and distribute funds until everyone has had a turn. The overall goal is to provide each member one opportunity to have a lump sum payout during the ROSCAs operation. For all but the last recipient, this methodology provides quicker access to the payout than individual savings would be able to amass in the same amount of time. For the local economy there is also a benefit: as the windfall is spent by each member the money is put directly back into circulation instead of being held as individual savings. The turnover of money accelerates. Once each member has received a payout the ROSCA can dissolve or recommence.
The contribution amounts vary from group to group. In broad terms, each member contributes exactly the same amount at each meeting. Bouman found, in 1995, that monthly payouts of ROSCAs in Cameroon varied between 50,000 and 50 million FCFA per month per member.146 That converts to between $187 and $187,000 in 1995. It is
143 Source: Atieno, Formal and Informal Institutions’ Lending Policies, 32.
144 Jacqueline Copeland-Carson, Kenyan Diaspora Philanthropy: Key Practices, Trends and Issues
(Cambridge: Harvard University, 2007), https://www.cbd.int/financial/charity/kenya-diaspora.pdf.
145 Ibid., 10.
likely that the individuals who can contribute to the top-tier ROSCAs would have access to formal banking, yet they choose to continue to be involved in ROSCAs for other reasons. Most ROSCAs are more modest. Akoten, Sawada, and Otsuka determined that in Kenya ROSCAs are “the most important source of credit in terms of average loan size,” which was 44,960 Ksh or about 500 U.S. dollars.147 In contrast to loans, in 2007, Gugerty’s study of 70 women’s ROSCAs that were in operation for an average of seven years, discovered that the average pot size was $25, which typically covers about a third of monthly expenses in Kenya.148
The sources of the money that are put into ROSCAs can also vary. Women entrepreneurs can invest their own income directly. The minority of Kenyan men who participate may likewise invest their earnings. The family may also decide to invest joint funds. Gugerty found that 41 percent of Kenyan women received money from their husbands for their ROSCA contribution, where the average support from the husband equated to $15.149
The easiest way to differentiate types of ROSCAs is by the way they allocate funds. The main methods are fixed, random, and bidding, the last of which is also called auction. In a fixed allocation scheme, the order of recipients is set from the beginning. Likely, the ROSCA completed a previous round and the member remained in the same position. In a random ROSCA, names are chosen through a lottery. The lottery may happen at the beginning of each meeting or when the ROSCA is formed. In a bidding ROSCA, members auction off the rights to take home the purse.
There is a commodity variant of ROSCAs. For Kenyan women, this typically manifests itself as a group that amasses home goods like kitchen utensils. Through these goods-based ROSCAs Kenyan women can acquire a large number household items more quickly than would be possible for them individually. For men, the favorites are radios, bikes, tools, and construction goods.150 In the commodity model, a second positive
147 Akoten, Sawada, and Otsuka, “The Determinants of Credit Access,” 933.
148 Gugerty, “You Can’t Save Alone,” 259.
149 Ibid., 267.
externality, beyond getting a large payout, happens. In the bike example, it is possible to take advantage of economies of scale and negotiate a group price. Another example that Lois Stevenson found was a scheme where members contribute building materials: fencing poles, roofing material, or manual labor.151 The donation of goods or skills is an interesting variant, because even those in abject poverty who may lack financial liquidity can participate and benefit.
The different variants and adaptations of ROSCAs are a testament to their flexibility. The bidding ROSCA seems to present the broadest range of modifications. On top of their set contribution, members desiring to take home the pot bid. As the bid goes higher, the winner takes home even more money. However, since the person who bids the most takes home the lump sum, there is a leveling effect. Since the final two or three bidders may be incentivized to outbid each other, to avoid giving another their contribution, some groups put a max percentage on bids. To avoid members artificially bidding up the pot, some groups take the bids and allocate them to a separate fund. This separate fund has a few positive externalities. Some groups choose to divide up this new pot at the end of the cycle; others use it to make loans to members. For low income ROSCAs, another adaptation is to offer a discount rate instead of a bid. The member who takes the pot is the one willing to take the lowest.
ROSCAs also have informal ways to deal with nonpayment. For fixed allocation funds, new members are often placed in the final payout positions. In this way, it ensures that they pay for the duration of the ROSCA, and then they can have a more favorable position in the next round. Additionally, the organizer or head of the ROSCA may take the first payout so that they can cover for other member’s nonpayment.152 Alternately, the first payout may be set aside.
Since the last player is at a disadvantage, several adaptations can level the playing field for them. Under certain setups, each winner may be expected to contribute slightly
151 Kimuyu, “Rotating Saving and Credit,” 1300.
more than the others in future rounds.153 For example, if the monthly buy in is $10, the first winner contributes $12 each subsequent month, the second contributes $11, and the third $10, etc. In this way, the final winner takes home a larger pot than the first, and puts in less money than his or her peers did to do so. A more simplistic option is to reverse the payout for the next round. In this setup, the final winner is the first winner the next time, and benefits from two large payouts in a row.154
One criticism of ROSCAs is that members only receive funds once. If an emergency arises after their initial distribution, they may have no means to get further funds. There are several ways in which the single payout problem can be addressed. In a bidding ROSCA, the bids may be divided among the non-winning members at each meeting. Additionally, ROSCAs may set aside a portion of the funds to provide loans to those facing emergencies. One of the most common ways that people address this problem is through simultaneous membership in multiple ROSCAs. Peter Kimuyu discovered that of the “45% of the 110 households participated, 65.3% in one scheme each, 20% in two schemes, 10% in three schemes, 2% in four schemes and one household in a record five schemes.”155 He also found that, as household size increased, so did a family’s number of ROSCA scheme memberships.156
Bidding ROSCAs often have organizers who receive commissions to do their jobs.157 For these associations, a positive net effect is job creation. So, not only can the lump sum payouts buy a capital asset that might be required to open a business, like a sewing machine, but the act of administrating informal finance creates jobs in the informal sector.
153 Bouman, “Rotating and Accumulating Savings,” 379.
154 Ibid.
155 Kimuyu, “Rotating Saving and Credit,” 1302.
156 Ibid., 1303.